The best internet business model: class action lawsuits?

The internet has produced some fantastically profitable business models
over the past decade and a half. But out of all of them, which is the
best?

Here's a candidate: class action lawsuits, which have been making their
way onto the consumer internet, where it seems they may become a dreaded
fixture.

Obviously, it's important that consumers have recourse against businesses that violate the law and cause them actual harm, and class actions provide a way for large groups of people to obtain recourse for a mass wrong. Yet in many industries, class actions have become little more than a cottage industry for trial attorneys, with the benefit to consumers being, in most cases, highly-questionable. Frequently, the only party that comes away with any real benefit at all is the attorneys.

This appears to be a growing problem in the tech industry. Cases in point:

The blogosphere erupts after it's alleged that social gaming giant Zynga has served up scummy CPA offers. A class action lawsuit is filed shortly thereafter.

Google is criticized on privacy after it launches its Buzz social network. A class action lawsuit is filed shortly thereafter, which Google settled for $8.5m. That money will go to "existing organizations focused on Internet privacy policy or privacy education" -- after the attorneys take their cut.

In 2008, Facebook was sued over its controversial Beacon advertising system. A $9.5m settlement was approved by a federal judge this year.

Two weeks ago, Ars Technica reported on Ringleader Digital, which uses HTML5 in lieu of cookies to track iPhone and iPad users as they browse the web. Last week, a lawsuit was filed against it seeking class action status.

Notice a pattern? Media criticizes a tech company, or plays up a mistake it made. Class action attorneys, like hawks, swoop in. It's a simple and in many cases highly profitable business model. This despite the fact that lawsuit filings are poorly written, and demonstrate that the attorneys writing them lack understanding about the technical issues key to their suit. But that, of course, doesn't really matter because the name of the game is to do just enough to coax a settlement.

While the companies sued may or may not be on the right side of the law (with tens of thousands of pages of laws on the books, one never knows), some might very well argue that the harm to consumers was tenuous at best. In several of the cases above, the lead plaintiffs for the proposed class look like little more than convenient shills who suffered no real harm at all.

So what's the big deal? $8.5m is nothing to Google, right? The problem with these class actions is that they could conceivably stifle innovation and competition in the tech industry death-by-a-thousand-pins-style.

While class actions generally target companies that can afford to settle or pay a hefty judgment, every dollar a company spends defending itself from a class action, and every settlement dollar transferred from a company's bank account to that of a trial attorney, represents one less dollar that could be put towards R&D, hiring and capital expenditures.

In a high-growth industry like tech, each dollar is important, and has the potential to go far. The class action lawsuits that increasingly seem to be targeting tech companies, particularly those active on the consumer internet, could impact tech like they've impacted other industries, where higher costs, decreased competition and inadequate service offerings are blamed in part on lawsuits and the threat of lawsuits. Consumers, of course, who these lawsuits are supposed to be 'protecting', almost always foot the bill in one form or another.

The answer? Obviously, the highly-litigious business environment in the United States isn't going away anytime soon. Successful companies there will have to watch themselves, or else. Or perhaps some of them will decide that in today's global economy, they can operate successfully from the comfort of a less litigous location.

Comments (3)

Kat

The question is if these lawsuits hadn't been filed would the companies involved have done anything about the problems? Would other companies pay less attention to what they were doing if they weren't aware of the lawsuits?
I'm about as fond of ambulance chasers as I am slugs, but when tech companies don't stop to think before getting carried away with how cool an idea is, this kind of thing is going to happen.

While class actions generally target companies that can afford to settle or pay a hefty judgment, every dollar a company spends defending itself from a class action, and every settlement dollar transferred from a company's bank account to that of a trial attorney, represents one less dollar that could be put towards R&D, hiring and capital expenditures.

It's only a matter of time before they start suing bloggers for browser incapability issues and running adWords ads like:

Most of the time, a business that messes up will learn its lesson without ligitgation. In the Google Buzz, Facebook and Zynga cases, it wasn't the threat of lawsuits that forced these companies to make changes. It was vocal consumer backlash.

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